Tarifflation’s Story Falls Apart

The August Producer Price Index (PPI) report marks yet another setback for those who anticipated President Donald Trump’s tariffs would lead to inflation. Instead of rising, the Bureau of Labor Statistics (BLS) revealed that producer prices in final demand dropped by 0.1% in August.

Economists had expected a gain of 0.3%, but this just reiterates how Wall Street economists remain fixated on tariff narratives. Year-over-year, the PPI increased only 2.6%, which is notably lower than the predicted 3.3%.

A revision for July was also on the downside, decreasing from a previous jump of 0.9% to just 0.7%. This highlights the reality—the notion that tariffs lead to widespread price hikes is losing its credibility.

The Margin Collapsed Again, and Price Changes Were Minimal

The most significant price declines were seen in services, which experienced a 0.2% drop. Notably, “trade services” fell sharply by 1.7%. The BLS measures the markup from wholesalers and retailers, and instead of passing those costs onto consumers, businesses seem to be absorbing the higher expenses. As Kamala Harris and numerous Wall Street economists have suggested, if tariffs act like a “national sales tax” for consumers, margins should either remain stable or even increase. However, they are actually decreasing, similar to trends observed in April and June.

Thanks to reduced energy prices, final product demand was down to just 0.1%. When excluding energy and food, the demand rose by 0.3%, while service prices fell by 0.2%.

Prices for personal consumer goods remained flat for the month, which suggests that tariffs are not placing any notable strain on consumers. Prices for personal electronics stayed the same, household goods dropped by 0.5%, car prices saw a minor increase of 0.2%, and home furniture prices also rose by 0.2%, while commercial furniture stayed flat. Interestingly, clothing prices for men and boys dipped by 0.1%, while those for women and girls remained unchanged.

This isn’t truly inflation; it’s more about relative price shifts across categories. If tariffs raise certain prices, they appear to be balanced out by reductions in others. As the Economic Advisors Council pointed out, many analysts are confusing shifts in relative prices with actual inflation. Some degree of price fluctuation is expected, but the true inflationary pressures are not evident.

In terms of the supply chain, the story is consistent. Product prices rose by 0.4%, but raw product prices fell by 1.1%, largely due to a 2.8% decline in crude oil prices. Temporary services saw a modest increase of 0.3%. These are not the stark signals that tariff critics had predicted. The inflation narrative seems to stall at the warehouse door.

From Isolated Discussions to Common Understanding

For months, the argument has been that tariffs aren’t truly harming consumers; while prices may rise, businesses and exporters are experiencing tightened margins. This perspective, initially a solitary stance I held in the first half of the year, appears to be gaining more acceptance.

Mohamed El-Erian on CNBC’s “Squawk Box” recently noted:

“We have exporters, importers, consumers, and we know that so far, consumers are the least burdened.”

This aligns perfectly with what the PPI data reveals: Margins are under pressure, costs are being absorbed, and consumers seem protected. The tariff narrative is losing credibility.

Time for Larger Fed Cuts

The Federal Reserve has long maintained that its decisions are “data-dependent.” If that holds true, the latest numbers suggest a need for more aggressive easing.

Producer prices have not just stagnated; they have decreased. Payroll growth has also been weaker than anticipated, with revisions indicating nearly a million jobs lost.

On CNBC, El-Erian candidly remarked: These figures suggest a dramatic slowdown of 50 basis points. The Fed can choose to continue attributing inflation to tariffs or face the reality that costs are being absorbed, inflation seems contained, and growth is decelerating.

The moment has come for significant cuts in interest rates, setting the stage for a series of reductions to move away from the current stringent monetary policy.